Thursday, August 27, 2009

Russia Has Problems

I asked a Russian friend how the financial and economic crisis had affected the regional art center in the Urals where she works. She said that she and her colleagues were coping with typical Russian resignation, and had made “нет дениг, нет проблем” (”No money, no problem”) their motto. _SeekingAlpha

No money, no problem? Maybe so. Certainly humans can learn to survive under a wide range of deprivations. But what is really happening in the post-Soviet era of Russian existence?

The Sayano-Shushenskaya dam disaster is widely considered to be a harbinger of potential problems. The direct economic consequences are severe, reducing Russian electrical generating capacity by 2 percent; this in fact understates the impact because the dam was an inframarginal (i.e., relatively cheap) source of power. The costs of repair are very high. Estimates run to $1.25 billion, but being estimates, being early, and being Russia, it is likely that the final bill will be much higher than that.

...But as bad as the direct cost of repairing this one dam is, the prospect that Russia is just waiting for many additional shoes to drop is even worse. And all at a time when there is no slack whatsoever in the budget; the state investment funds are being depleted rapidly, the budget deficits are forecast to be at the very upper limit that the country can run without risking grave risks to the currency, and Russia plans to return to the debt markets soon to cover its existing shortfalls. Nor can the country rely on foreign investors to step into the breach. The combination of poor economic prospects and a history of mistreatment has exacted its toll.

...In brief, Russia faces a yawning capital gap. The country has lived, after a fashion, on the Soviet inheritance, from huge hydro stations to massive gas fields. ”Deferred maintenance” became a modus operandi. The Sayano-Shushenskaya disaster is just a vivid illustration of the consequences of this. It makes me wonder what the true rate of Russian growth in recent years would be, if the true depreciation/consumption of capital were taken into account. The country has consumed much of its seed corn.

The country’s major source of cash–the energy business–has lived off the Soviet inheritance as well, so Russia can’t look to that for succor; indeed, that sector needs a massive infusion of capital too. Foreign investors won’t step up. Compared to other countries, Russia invested relative little as fraction of its GDP even during the seven fat years.

What Russia needs, is to eliminate corruption and bring the "rule of law" to a relatively lawless state. Then it could open investments to foreign capital, and obtain the needed infrastructural improvements that can save the economy -- in the short term.

In the long term, Russia needs to become a country where young men and women can feel safe to marry and raise families, knowing that their children have a good chance at freedom, prosperity, and safety from crime and an arbitrary government.